A slew of economic reports on Thursday plus a residential construction disaster on Friday caused a huge decline in the GDPNow estimate. Details below.
Two-Day Summation
- The base GDP nowcast fell from 2.9 percent on Wednesday to 2.4 percent on Thursday based on a slew of economic reports and then to 2.0 percent on Friday based on the residential construction report.
- The Real Final Sales (net) was not impacted by the Wednesday reports but took a 0.4 percentage point hit from the construction report.
Chart Details
Three Thursday Components
- Retail Sales (Green): Retail Sales Surge In July from Smaller Negative Revision
- Import Export Prices (Yellow): I did not do a report but import prices rose only 0.1 percent while export prices rose 0.7 percent
- Industrial Production (red): Industrial Production Declines 0.6 Percent on Top of Big Negative Revisions
Thursday morning, I did a Tweet saying “expect a surge in GDPNow forecast.” But I had not looked at Industrial production.
The above chart shows PCE Goods (green) rose 0.22 percentage points and import-export prices (yellow) added 0.05 percentage points. I expected a bit more from the
Also on Thursday, PCE services (red) declined 0.21 basis points due to industrial production. All of that netted to zero in terms of Real Final Sales.
In addition, the Change in Private Inventories (CIPI) estimate went from +0.17 to -0.28 PP, a net of -0.45 which took the headline forecast from 2.9 percent to 2.4 percent without impacting real final sales.
Understanding the Inventory Adjustment
I explained the CIPI adjustment on Thursday in Retail Sales Surge but GDPNow Forecast Declined, What Happened?
The economic reports on Thursday were strong except for industrial production. GDPNow creator, Pat Higgins, explains the decline.
There is a bit more discussion in my article but here is the key point from Pat Higgins.
It looks like the majority of the decline was due to the model’s forecast for motor vehicle and parts dealer inventories falling. The industrial production variable for motor vehicle assemblies is one of the variables used within the model to make that forecast, and those assemblies fell a little more an 12 percent from June to July according to the IP report.
Residential Construction
On Friday, I commented Housing Disaster: Single-Family Starts Crash 14.1 Percent in July
Residential Construction Key Points
- Privately-owned housing starts in July were at a seasonally adjusted annual rate of 1,238,000. This is 6.8 percent (±10.3 percent) below the revised June estimate of 1,329,000 and is 16.0 percent (±10.5 percent) below the July 2023 rate of 1,473,000.
- Single-family housing starts in July were at a rate of 851,000; this is 14.1 percent (±8.3 percent) below the revised June figure of 991,000.
- Privately-owned housing completions in July were at a seasonally adjusted annual rate of 1,529,000. This is 9.8 percent (±8.4 percent) below the revised June estimate of 1,696,000, but is 13.8 percent (±13.9 percent) above the July 2023 rate of 1,343,000.
I suspect the big hit to GDPNow was due to the drop in completions as opposed to starts but I have not confirmed that.
If so, the decline in starts will impact future completions.
Pieces That Don’t Seem to Fit
- Motor vehicle assemblies fell 12 percent from June to July according to the Industrial Production report.
- Motor vehicles and parts sales rose 3.6 percent according to the retail sales report.
Adding to the discussion, sales are recorded when manufacturers ship vehicles to the dealer, not when a consumer actually buys a vehicle.
And finally, the 3.6 percent surge was on the heels of a 3.4 percent decline the previous month.
A Bit of Skepticism
I am more than a bit skeptical of the retail sales report.
Looking ahead, I expect negative revisions to the retail sales and economic reports in general.
The huge decline in Industrial Production is another indicator of a severely weakening economy. Retail sales does not change my prognosis that a recession is underway.
Recession Underway
July 25, 2024: “All Hell Breaks Loose” In the Next Few Months as Recession Bites
August 2: Unemployment Rate Jumps, Jobs Rise Only 114,000 with More Negative Revisions
August 2: 2024: The McKelvey (Sahm) Unemployment Rate Recession Rule Just Triggered
August 15, 2024: Industrial Production Declines 0.6 Percent on Top of Big Negative Revisions
It seems to me that all hell breaking loose.